Should You Roll Your 401(k) to an IRA When You Retire?
An IRA gives you more options. A 401(k) sometimes gives you stronger creditor protection and better institutional pricing. Here's how to decide.
The case for rolling to an IRA
- Vastly more investment choices (any ETF, stock, or mutual fund).
- Easier to consolidate if you have multiple old 401(k)s.
- Lower expense ratios at Vanguard, Fidelity, or Schwab.
- Roth conversions are easier from an IRA.
The case for leaving it in the 401(k)
- Stronger creditor protection in some states (401(k)s are ERISA-protected federally).
- Rule of 55 — if you separate from service at 55+, you can withdraw from that 401(k) penalty-free.
- Institutional share classes sometimes cheaper than retail equivalents.
- Net unrealized appreciation (NUA) treatment for employer stock.
Special case: NUA
If you have highly appreciated employer stock in your 401(k), a special rollover called NUA lets you pay long-term capital gains rates on the gain instead of ordinary income. Can save 10–20% in taxes. Get a CPA before doing this — one wrong move blows it.
The rollover mechanics
Always use a direct trustee-to-trustee transfer, never a check made out to you. A 60-day indirect rollover triggers 20% withholding and can cost you the entire rollover if you miss the deadline.
Bottom line
For most retirees, rolling to an IRA at Fidelity or Vanguard is the right move. Exceptions: heavy employer stock (NUA), retiring at 55 with the Rule of 55 available, or living in a state with weak IRA creditor protection (FL and TX are strong; CA is weaker for IRAs).